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Take baby steps towards investment with Ultra Short-Term Funds

By Nivesh Gyan   3 April

Category: Better Than FDs

What are Ultra Short-Term Funds?

Ultra Short-Term Funds are the debt funds that invest in fixed income instruments that are mostly liquid and have short-term maturities.

How do Ultra Short-Term Funds work?

  • These funds primarily invest in instruments like commercial paper, treasury bills, certificate of deposit and corporate paper with average maturity of more than 91 days. The investment is mostly made in securities that mature within a week to about 18 months.
  • Ultra Short-Term Funds predominantly earn from the coupon (interest) received from the underlying debt instruments.
  • These funds are similar to liquid funds but have longer maturities than Liquid Funds (the ones that invest in securities with maturity up to 91 days).
  • Most of the Ultra Short-Term Funds do not levy exit load. However, a few do levy a small exit load of 0.25-0.5% for a time period of 1 week to 6 months.

Why should one invest in Ultra Short-Term Funds?

  • Perfect solution for the new investors and the ones looking to invest their money for short term.
  • Higher returns can be expected from Ultra Short-Term Funds as compared to Liquid Funds.
  • Less volatile than the Dynamic Income Funds where the underlying bond prices change even on a daily basis.
  • Can act as a mother fund for Systematic Transfer Plan (STPs) in equity. For the ones wanting to invest a lump sum amount in an equity fund, it is ideal to put money in Ultra Short-Term Funds and switch a regular sum every month to the equity fund.

Ultra Short-Term Funds and Taxation

Holding Period Income Treatment Tax Implication
Less than 3 years Short-Term Capital Gain Added to income and taxed as per individual’s tax bracket of 10%, 20% or 30%
More than 3 years Long-Term Capital Gain 20% with indexation benefit on cost